### Currency Risk Management Case Study: Daltrey Company#### Transaction Details- **Company**: Daltrey Company- **Purchase**: Recording equipment- **Seller**: The Detours Inc.- **Amount**: £250,000- **Purchase Date**: September 21, 2020- **Payment Due Date**: December 19, 2020#### Forward Contract- **Date of Contract**: September 21, 2020- **Forward Contract Term**: 90 days- **Purpose**: To manage the exposed net liability position in UK Pounds- **Forward Rate**: £1 = $1.23#### Spot Rates- **September 21, 2020**: £1 = $1.21 - **December 20, 2020**: £1 = $1.24#### Financial AnalysisTo determine whether entering the forward contract worked well for Daltrey Company in terms of the US dollars needed to settle both transactions, compare the costs under different scenarios.1. **Without Forward Contract**: - Spot rate on December 20, 2020: £1 = $1.24 - Total cost in USD: £250,000 * $1.24 = $310,0002. **With Forward Contract**: - Forward rate: £1 = $1.23 - Total cost in USD: £250,000 * $1.23 = $307,500By entering into the forward contract, Daltrey Company managed to settle the transaction at a lower cost (by $2,500) compared to relying on the spot rate on the payment due date.#### ConclusionThe forward contract was beneficial for Daltrey Company. It allowed them to mitigate currency risk and save $2,500 on the transaction compared to the spot rate on the payment due date. This case highlights the utility of forward contracts in managing currency exposure effectively.

Answer: Yes, without the forward contact, company would have to pay more US $ to acquire € on…

Daitrey Company purcnased recording equip tours inc. September 21, The Detours, Inc. on December 19, 2020. Additionally, on September 21, Daltrey entered into a 90-day forward contract to purchase £250,000 at a rate of £1 = $1.23. The forward contract was entered into to manage the exposed net liability position in UK Pounds, but it was not designated as a hedge. The spot rates were: 09/21/20 £1 = $1.21 12/20/20 £1 = $1.24 Looking back on the entire situation (i.e., the original transaction and the forward contract) in terms of the US$ needed to settle both transactions, did entering into the forward contract work out well for Daltrey Company

Daitrey Company purcnased recording equip tours inc. September 21, The Detours, Inc. on December 19, 2020. Additionally, on September 21, Daltrey entered into a 90-day forward contract to purchase £250,000 at a rate of £1 = $1.23. The forward contract was entered into to manage the exposed net liability position in UK Pounds, but it was not designated as a hedge. The spot rates were: 09/21/20 £1 = $1.21 12/20/20 £1 = $1.24 Looking back on the entire situation (i.e., the original transaction and the forward contract) in terms of the US$ needed to settle both transactions, did entering into the forward contract work out well for Daltrey Company

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

See similar textbooks

Similar questions

On June 1, Maxwell Corporation (a U.S.-based company) sold goods to a foreign customer at a price of 1,110,000 pesos and will receive payment in three months on September 1. On June 1, Maxwell acquired an option to sell 1,110,000 pesos in three months at a strike price of $0.076. The time value of the option is excluded from the assessment of hedge effectiveness, and the change in time value is recognized in net income over the life of the option. Relevant exchange rates and option premia for the peso are as follows: Date June 1 June 30 September 1 Maxwell must close its books and prepare its second-quarter financial statements on June 30. a-1. Assuming that Maxwell designates the foreign currency option as a cash flow hedge of a foreign currency receivable, prepare journal entries for the export sale and related hedge in U.S. dollars. a-2. What is the impact on net income over the two accounting periods? b-1. Assuming that Maxwell designates the foreign currency option as a fair value…
In mid-July, JK Ltd (a US firm) holds a pay-fixed, receive-floating 6×9 FRA contract which was entered into 6 months ago (i.e. in mid-January). The FRA rate is 0.70% per annum and the notional amount is $20,000,000. The 6×9 FRA reaches expiration now (in mid-July), and the following LIBOR rates are observed from the market: Maturity 30-day LIBOR Interest rate (p.a.) 0.5% 90-day LIBOR 1.1% 180-day LIBOR 1.2% 270-day LIBOR 1.3% Note: The FRA contracts follow the standard US FRA settlement terms and adopt the Actual/360 day count convention. All interest rates are measured with a compounding frequency reflecting the length of the period they apply to. Required: (a) Based on the information above, explain whether JK Ltd makes a gain or loss by showing the settlement amount for JK Ltd to settle the 6×9 FRA at expiration. Report your answer in 2 decimal places (dps). (b) Suppose that JK Ltd plans to take a 20-million 90-day floating-rate loan in mid-October from a local bank. The firm wants…
Icebreaker Company (a U.S.-based company) sells parts to a foreign customer on December 1, 2020, with payment of 16,000 dinars to be received on March 1, 2021. Icebreaker enters into a forward contract on December 1, 2020, to sell 16,000 dinars on March 1, 2021. The forward points on the forward contract are excluded in assessing hedge effectiveness and are amortized to net income using a straight-line method on a monthly basis. Relevant exchange rates for the dinar on various dates are as follows: Date Spot Rate Forward Rate(to March 1, 2021) December 1, 2020 $ 3.40 $ 3.475 December 31, 2020 3.50 3.600 March 1, 2021 3.65 N/A Icebreaker must close its books and prepare financial statements at December 31. a-1. Assuming that Icebreaker designates the forward contract as a cash flow hedge of a foreign currency receivable, prepare journal entries for the sale and foreign currency forward contract in U.S. dollars. a-2. What is the impact on…
Required Information On January 1, 2024, Avalanche Corporation borrowed $102,000 from First Bank by issuing a two-year, 8% fixed-rate note with annual interest payments. The principal of the note is due on December 31, 2025. • Avalanche wanted to hedge against declines in general interest rates, so it also entered into a two-year SOFR-based interest rate swap agreement on January 1, 2024, and designates it as a fair value hedge. Because the swap is entered at market rates, the fair value of the swap is zero at inception. • The agreement called for the company to receive fixed interest at the current SOFR swap rate of 5% and pay floating interest tied to SOFR. This arrangement results in an effective variable rate on the note of SOFR + 3%. • The contract specifies that the floating rate resets each year on June 30 and December 31 for the net settlement that is due the following period. In other words, the net cash settlement is calculated using beginning-of-period rates. The SOFR rates…
Suppose that a party wanted to enter an FRA that expires in 121 days and is based on 56-day LIBOR. The dealer quotes a rate of 0.033 on the FRA. Assume that at expiration, the 56-day LIBOR is 0.028, and the notional amount is USD10,000,000. What is the payoff of the FRA short position? |-7744.05
2) XYZ has cash of FC 100,000 on both April 30 and May 31, 2010. The applicable spot rates for April 30 and May 31 are as follows: April 30: 1US = 5FC May 31: 1 US= 4FC How much is the FX transaction gain or loss on May 31, 2010.
i need the answer quickly
On June 1, Maxwell Corporation (a U.S.-based company) sold goods to a foreign customer at a price of 1,170,000 pesos and will receive payment in three months on September 1. On June 1, Maxwell acquired an option to sell 1,170,000 pesos in three months at a strike price of $0.082. The time value of the option is excluded from the assessment of hedge effectiveness, and the change in time value is recognized in net income over the life of the option. Relevant exchange rates and option premia for the peso are as follows: Put Option Premium Spot Date for September 1 Rate (strike price $0.082) June 1 S 0.082 June 30 0.081 September 1 0.080 $ 0.0045 0.0032 N/A Maxwell must close its books and prepare its second-quarter financial statements on June 30. a-1. Assuming that Maxwell designates the foreign currency option as a cash flow hedge of a foreign currency receivable, prepare journal entries for the export sale and related hedge in U.S. dollars. a-2. What is the impact on net income over…